University reforms have created "middle-income poverty trap"

Systems of financial support for poorer students applying to university are confusingly complex and involve dramatic “cliff-edges” where help for the marginally better-off suddenly disappears, new analysis has found.

The study|, published today by the Centre for Analysis of Social Exclusion at the London School of Economics and Political Science, analyses the means-tested bursaries and fee reductions that the largest 52 universities have offered to students applying to start in the Autumn, when fees will increase to up to £9,000 per year. The study, by John Hills and Ben Richards, finds that:

Half of the universities – mainly from the elite Russell Group – are offering means-tested bursaries and fee reductions to students from lower-income families worth several thousand pounds, on top of the government grant of £3,250 for those with incomes below £25,000 (falling on a sliding scale up to incomes of £43,000).

The others generally offer a fixed number of students help under the new National Scholarship Programme, often worth £3,000 per year for those with family incomes up to £25,000, but none above it.

Each university has its own system of means tests, and apply a wide range of other varying conditions for eligibility. This makes it very hard for those applying to make an informed choice between universities.

“Cliff edges” in support mean that a small difference in parental income can mean several thousand pounds’ less support – much greater than the falls that caused controversy around the Coalition government’s original proposals for sharply withdrawing Child Benefit from higher-rate taxpayers last year.

The fall in value of awards with parental income comes on top of income tax and national insurance, and overlaps with tax credit withdrawal. Together this can mean that families face what amount to retrospective tax rates of well over 100 per cent if their income had changed by £1,000 around particular thresholds.

In the most extreme case, Oxford University offers first-year students fee
reductions and bursaries worth £13,050 (with government grants) if their parents earned up to £17,000 in 2010-11, but nothing if they had earned £44,000. But after taxes and other means-tests, the higher earning family would originally only have been £13,250 better off. Taken as a whole, in retrospect the family would have gained only £200 – an effective tax rate of 99 per cent over the whole of a £27,000 earnings range. Over particular ranges, tax rates are much higher.

John Hills, Director of CASE, who led the study|, said that: “As cuts have collided with attempts to protect the poorest, combined with a move to more ‘localised’ decision-making, we are seeing a move back towards lower-level institutions designing their own means-tests. But this case study suggests that the end result can be overlapping systems that are complex, very hard to compare, and have undesirable side-effects.”

“A main aim of Coalition social security policy has been to try to unify means tests through the new Universal Credit, designed to simplify the system and avoid the worst aspects of the poverty trap. But other parts of government are developing systems which run in precisely the opposite direction.”

“People are unlikely to understand the rules of the system well enough to change their behaviour in advance – but after the event they may well be aggrieved if they discover that their family is little or no better off – or even worse off – as a result of having had higher earnings.

“The problems of effective tax rates at – or far above – 100 per cent show how hard it can be to protect the poorest when substantial universal benefits or services are withdrawn and the limits to what can be done through means-testing without painful side-effects.”

1. The study, Localisation and the means test: A case study of support for English students from Autumn 2012, by John Hills and Ben Richards, CASEpaper 160 is published by the Centre for Analysis of Social Exclusion (CASE) at the London School of Economics. The study draws on research supported by the Economic and Social Research Council (ESRC).

2. For further media enquiries contact the LSE press office on 020 7955 7060 or at pressoffice@lse.ac.uk|.

3. The study is launched at a seminar at CASE at 1pm on 2 May. For details of the event, contact Cheryl Conner on 020 7955 6562 or c.j.conner@lse.ac.uk|.

6. The study covers the 20 Russell Group universities and 32 other larger higher education institutions, together accounting for 59 per cent of UK undergraduates.

7. It focuses on English students studying full-time and living away from home, as rules differ for students from other parts of the UK or in other situations.

8. Means-tested support for students is based on “residual income” – mostly parents’ gross earnings from two years earlier (less an allowance for other children still at home), plus students’ unearned income during the academic year.

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